China’s Stock Market: Of Bears and Rabbits

Guo Shuqing, chairman of the China Securities Regulatory Commission, seen through a viewfinder at a news conference during the 18th Party Congress in November in Beijing.

China’s stock market regulator says he has confidence in the market.

He seems to be in the minority.

The stock market’s key barometer – the Shanghai Composite average — closed below the key 2,000 level on Tuesday and then kept heading south. It dropped to a fresh nearly four-year low on Wednesday, its third straight lower close.

Advertisement

On Thursday the market was up a tepid 0.1% midsession before reverting to the norm and ending down 0.5%, hitting yet another nearly four-year low.

Top stock regulator Guo Shuqing knows a hot potato when he sees one. Invited to address a financial gathering in Beijing, he kept his prepared remarks to other topics, such as the recent Communist Party congress and its implications. He tried to make a quick getaway – a bit like a lucky trader with some profits still on the table and ready for the taking.

But the waiting press wasn’t giving up so easily. They peppered him with questions about what’s in store for the market and whether there are plans to try to turn things around.

“All I will say about the market is I have confidence in it,” he told a gaggle of disappointed reporters.

The party congress – which comes but once every five years — may have something to do with the market’s current malaise. Some investors were hoping for announcements of government support for the market, buying ahead of the meeting and then planning to sell into strength. Unfortunately, there wasn’t much strength to sell into.

Investors may also be worried about that small matter of the U.S. fiscal cliff. A tanking of the U.S. economy would hardly help China’s exporters.

The market appears to be headed for its third straight year of losses – not just a little bit of market correction but big dollops of downside direction. The Shanghai index is lagging by roughly 10% so far this year after losing 22% last year and 14% in 2010.

The average daily turnover on China’s stock markets has been 68.4 billion yuan ($11 billion) over the first three sessions of this week, below the average of 101.4 billion yuan in October, which was the lowest month so far this year.

It is more than a little bit odd that the market is shrugging off indications that the Chinese economy may be getting in gear again. There have been positive signs from industrial output and profits, while the old threat of inflation seems tamed for now. Even exports have started to look a bit stronger.

For one, the problem is liquidity. Investors have been hoping to see an interest-rate cut or an easing of bank reserve requirements, a move that would let them lend more of their deposits.

There have been three cuts in the reserve requirement over the past 12 months, but the last one was in May. There were two interest rate cuts — in June and then in July — but nothing since.

Investors are reluctant to buy as they haven’t seen any signal of a turnaround in the market.

“Local retail investors have lost faith on the stock market over the past three years. How can we expect investors to rush into a market where all expectations for a bottom, say the 3000 and the 2000 level, have proven to be wrong?” said Amy Lin, analyst at Capital Securities.

“The market is likely to stay weak until the government launches significant market-friendly measures, such as more stock buybacks of listed companies and another cut in banks’ reserve requirement ratio,” she said

Mr. Guo, who is widely considered one of the leading candidates to be the next central bank governor, has won a reputation as a reformer who does have some big ideas for the market. He has pushed for strengthened market regulation while trying to encourage a bigger role for long-term investors – including foreign institutions.

But so far the bears seem to be in charge. If Mr. Guo has some rabbits to pull out of his hat, so far he’s not telling.

About China Real Time Report

China Real Time Report is a vital resource for an expanding global community trying to keep up with a country changing minute by minute. The site offers quick insight and sharp analysis from the wide network of Dow Jones reporters across Greater China, including Dow Jones Newswires’ specialists and The Wall Street Journal’s award-winning team. It also draws on the insights of commentators close to the hot topic of the day in law, policy, economics and culture. Its editors can be reached at chinarealtime@wsj.com.